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Discretionary Spending Under the Budget Control Act of 2011

August 8, 2011

Last week the President signed into law the Budget Control Act of 2011, which establishes caps on discretionary spending through 2021. This blog post provides some background information about discretionary spending and a brief description of the new caps and how they will be enforced.

What is discretionary spending used for?

Discretionary spending is the part of federal spending that lawmakers control through annual appropriation acts. Mandatory spending, in contrast, occurs each year without such legislation; spending for mandatory programs is generally determined by setting the programs parameters, such as eligibility rules and benefit formulas, rather than by appropriating specific amounts each year.

Discretionary spending totaled more than $1.3 trillion in 2010, or nearly 40 percent of federal outlays. Just over half of that discretionary spending ($689 billion) was for defense programs, mainly operation and maintenance, military personnel, and procurement. The rest ($660 billion in 2010) paid for an array of nondefense activities. Seven broad budget categories accounted for more than 75 percent of the spending for nondefense discretionary activities last year. The largest of those is the category covering education, training, employment, and social services; it is followed in size by the categories for transportation, income security programs (mostly housing), and health-related research and public health. Categories with smaller amounts of discretionary spending include administration of justice (mostly for law enforcement activities), veterans benefits and services (mostly for health care), and international affairs.

Defense and Nondefense Discretionary Spending in 2010

Notes: Other defense spending includes outlays for research, development, test, and evaluation; military construction; and family housing; as well as spending on some defense-related activities by government entities other than the Department of Defense. Other nondefense discretionary spending includes outlays for general science, space, and technology; energy; natural resources and environment; agriculture; commerce and housing credit; community and regional development; Medicare and Social Security (for administrative activities); and general government. Nondefense discretionary spending for health excludes care provided by the Veterans Health Administration. Outlays for that care are included under veterans benefits and services.

What is the role of discretionary spending caps?

Because the Congress sets funding for discretionary programs each year, cutting spending through the regular appropriation process can ensure only short-term savings. An approach to try to ensure longer-term savings that has been used in the past and that is used again in the Budget Control Act of 2011 is to set overall limits on discretionary spending for future years.

Statutory caps on discretionary spending were imposed in 1990, and extended in 1993 and 1997, before expiring in 2002. Many observers agree that as long as a consensus remained to rein in budget deficits, the spending caps helped curb the growth of discretionary spending. Such spending increased at an average rate of only 1.6 percent a year during the 1990s. When budget deficits gave way to surpluses late in the decade, however, the caps were overridden in the appropriation process and later allowed to expire. Since 2001, discretionary spending has increased at an average annual rate of 8.2 percent.

How will the new caps work?

The Budget Control Act of 2011 sets caps on appropriations of new discretionary budget authority that start at $1,043 billion in 2012 and $1,047 billion in 2013, and then grow by about 2 percent per year thereafter, reaching $1,234 billion in 2021. (Discretionary appropriations for 2011 totaled $1,067 billion; some provisions in the 2011 appropriation act affected mandatory spending, and the legislation was credited with $17 billion in reductions of budget authority for mandatory spending.) By 2021, under these caps, discretionary appropriations will be about 9 percent less than CBOs baseline projections, which reflect an assumption that future appropriations will be the same as those provided for 2011 plus adjustments for inflation.

For 2012 and 2013, separate caps for security and nonsecurity budget authority will be in effect; from 2014 on, only one cap will apply to total discretionary funding. For purposes of the discretionary caps, the security category comprises discretionary appropriations for the Department of Defense, the Department of Homeland Security, the Department of Veterans Affairs, the National Nuclear Security Administration, the intelligence community management account, and all budget accounts in the category of international affairs.

The caps will not apply to spending for the wars in Afghanistan and Iraq and for similar activities (sometimes referred to as overseas contingency operations) or to certain amounts of additional spending for program integrity initiatives aimed at reducing the amount of improper benefit payments for certain programs; for the latter, the act will allow upward adjustments to the caps by specified maximum amounts. In addition, the law provides for adjustments to the caps in each fiscal year to account for funding designated for emergency requirements and certain types of disaster relief. The cap adjustments for disaster relief will be limited to amounts based on historical averages for such funding.

If appropriations for a particular year exceeded a cap, an across-the-board reduction would be applied to the budget accounts in the relevant category so as to bring the funding down to the capped amount.

Allowing for cap adjustments of roughly $160 billion to $190 billion a yearthe amounts in CBOs baseline for overseas contingency operations (an extrapolation of current spending and not a prediction of how much the United States will spend on such operations)discretionary spending under these caps would decline from about 9 percent of GDP in 2011 to 6.2 percent in 2021, a percentage roughly equal to what occurred from 1998 through 2001, but well below the 8.7 percent average over the past 40 years (see the figure below).

Discretionary Spending (Percent of GDP)

Note:Projections include spending associated with the wars in Afghanistan and Iraq and for similar activities (sometimes referred to as overseas contingency operations, or OCO). They reflect the assumption that the amount of funding provided in 2011 for OCO would continue to be provided for similar activities in future years, with adjustments for inflation. CBOs March 2011 baseline was adjusted to incorporate the effect of full-year appropriations for 2011, which were enacted after that baseline was completed.

What would be involved in reducing defense discretionary spending?

Assessing large and sustained reductions in defense spending would involve weighing their effects on military capabilities. Lawmakers would have many options to consider. Cuts could be targeted toward personnel levels, pay rates, and benefits; training and supplies; day-to-day operating and administrative costs; procurement, operation, and maintenance of existing weapon systems; and research and development related to more-advanced weapon systems. Such reductions in funding could require changes in broad strategic objectivessuch as the number of simultaneous conflicts in which the military could engage and their intensity, duration, and overlapor changes in how the nation seeks to achieve those broad objectives. Trade-offs could involve, for example, the choice between fielding a smaller force with more-capable weapon systems and maintaining the current number of units but forgoing some of the upgrades to their weapon systems.

A smaller force might not be able to handle as many conflicts at the same time, but it could be structured to maximize its flexibility to engage a variety of opponents with different capabilities or in different parts of the world. Conversely, a larger force would be better able to sustain longer-term counterinsurgency or peacekeeping operations.

Earlier this year, CBO discussed possible changes to discretionary spending as part of its biannual report Reducing the Deficit: Spending and Revenue Options. (For the most part, the budgetary effects of the options in that volume are measured relative to CBOs January 2011 baseline projections; those that are related to defense procurement were measured relative to the Defense Departments 2011 Future Years Defense Program.) In keeping with CBOs mandate to provide objective, impartial analysis, that report and other CBO publications make no recommendations.

What would be involved in reducing nondefense discretionary spending?

Cuts in nondefense discretionary spending could affect a broad range of activities, and decisions about particular programs would have impacts that would need to be weighed against the effects of alternative decisions. Many programsespecially in the areas of education and transportationinvolve financing from federal, state, and local governments. Reducing federal support for such activities would force other levels of government to make decisions about decreasing the scope of the activities, increasing their own funding, or some combination of the two.

Other types of spending reductions would also pose significant trade-offs. Federal income support payments and education grants to low-income households could be reduced or provided to smaller sets of households, which would mean less assistance for people who may value those benefits highly. A variety of federal activities could simply be curtailedranging from research by the National Institutes of Health to export promotion by the Department of Commerceso the value of those activities would need to be carefully assessed.

Lowering pay rates for federal civilian employees would hamper efforts to recruit and retain workers (particularly in some occupations), which would reduce the overall skill level of the federal workforce over time. Having fewer federal workers would probably lower the levels of service that federal agencies provide to the public, unless cuts in the agencies workforces were accompanied by actions to enhance productivity. Charging userssuch as drivers on highways, air travelers, users of waterways, and so forthfor services they receive from federal programs could allow service levels to be maintained while government spending was reduced. Of course, such charges would impose added burdens on users, compared with current arrangements.